Proof of Stake (PoS) Guide – All You Need to Know

There are several consensus algorithms in the market that have been implemented in different blockchains in the last years. Two of the most important are Proof of Work (PoW) and Proof of Stake (PoS). In this article, we will be talking about PoS and how it is one of the most energy-efficient consensus algorithms in the market. 

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What is Proof of Stake?

Proof of Stake is the consensus algorithm through which a blockchain network is able to get a consensus in the community in a decentralized way. In order for PoS to work, it needs validators that would be achieving consensus through a range of random selections. 

There are several selection methods on who is going to be discovering the next block with transactions. One of the easiest ways is to take into account the number of coins a user is holding. If that user holds more coins, then it may be selected more times than others. Those users that are selected by the network would receive the fees paid by the users in the network. 

One of the main benefits of the PoS system is related to the fact that it does not need large amounts of energy to work. It can simply work without using the ASIC miners that the Bitcoin network needs. In the next section, we will be sharing with you which are the main differences between PoS and PoW. 

Differences with Proof of Work

As mentioned before, there are many differences between the PoS consensus algorithm and the PoW. Each of these networks performs better in some fields, but they would work in a very efficient way when it comes to providing consensus to a decentralized network. 

The main difference between these two consensus algorithms is related to the fact that PoW consumes large amounts of energy. This can be seen with the electricity that is consumed by Bitcoin miners all over the world. Data shows that Bitcoin has electricity consumption as Israel with 58.6 TW/h per year. 

PoS solves this issue and allows blockchain networks to be more efficient considering it is not necessary to acquire expensive mining hardware. Thus, the effects on the environment are lower than with PoW networks such as Bitcoin or Litecoin. 

It is also worth mentioning that participating in a PoS network may be easier considering that many users can start solo staking through their exchange providers or other sites that work in bulk such as pools. Meanwhile, the PoW networks are much more expensive for users to join considering individuals have to buy ASIC miners and be part of a mining pool. 

Another difference between these two networks is related to the fact that PoW networks reward miners for the work they perform through Block rewards. This is different from PoS networks that do not work with rewards in each of the blocks, but instead, participants are rewarded with transaction fees. 

Despite all these differences, PoW supporters consider that as they are consuming electricity, energy and paying employees to keep the machines running, the currencies that run on top of their networks have real value that can be compared to the value of gold, specifically Bitcoin. Meanwhile, PoS supporters consider that they are more decentralized than mining activities performed by PoW networks. 

Centralization and Decentralization Issues

As we have hinted in the previous section, a PoW consensus algorithm will result in a more centralized network. This is due to the fact that there are large organizations and companies that acquired ASIC miners on bulk and that are now controlling a large part of the total computing power of the network. 

For example, now in China, there are dozens of miners that concentrate almost 70% of the total hash rate of Bitcoin. Instead, with the PoS consensus algorithm, this is more difficult to do. Of course, the richest addresses could also concentrate large amounts of the network, however, the barriers to enter a PoS network are lower than on the PoW ecosystem. 

Normal individuals using PoW would not be able to discover a block by themselves, they would only be able to go to a mining pool and share the rewards with other miners. With PoS things are different, something that could be fairer for the market. Indeed, the coins will be rewarded proportionately to the number of coins that they have invested in the staking pool.